Wells Fargo cuts Lululemon target on margin pressure
The firm said Lululemon's near-term outlook remains difficult, and further estimate cuts are likely.
It reduced its FY2025 EPS forecast to $14.60, near the low end of the company's guidance, and took down FY2026 EPS to $14.90, well below consensus at $15.52. The reduced target is based on a 15x multiple, which Wells described as 'trough-level' but warranted given the risk of 'over-earning' and ongoing execution missteps.
Wells flagged weak North America trends, with 2Q comps likely flat to slightly positive, driven more by clearance activity than underlying demand. Despite some success with new fabrics and styles, the firm said the return of more color has not reignited interest among U.S. consumers.
In China, growth appears to be slowing after a sharp sequential decline last quarter. The firm cut its 3Q/4Q China comp forecasts to +12% and +10%, down from prior expectations of +15% for both quarters. Given China's higher margin profile, any softness there could pose a risk to the company's profitability going forward.
Markdowns have increased in July, and tariff-related costs, particularly from Vietnam, could shave 50-100 basis points from margins in late 2025 into 2026. Wells lowered its 3Q and 4Q gross margin assumptions by 25bps as a result.
Bottom line, the firm sees limited near-term upside as Lululemon navigates softening demand and growing cost pressures.
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